FRANKFURT: European shares tumbled on Thursday to their lowest level since December, after the European Central Bank warned that inflation could worsen if the Middle East conflict drags on.
The ECB’s remarks, its first since the conflict began, and the market’s reaction underscore how asset prices remain heavily tied to developments in the Middle East, with Europe highly exposed to risks from surging oil prices and supply disruptions.
The pan-European STOXX 600 index closed 2.4 percent lower at 583.73 points, erasing gains from earlier this week.
“If energy prices keep rising, we suspect that the balance of opinion will shift towards getting on the front foot by hiking at the next meeting at the end of April, and perhaps by as much as 50 basis points,” said Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics.
Iran energy facilities across the Middle East on Thursday following Israel’s strike on its major South Pars gas field, pushing oil prices higher and reinforcing fears of a prolonged conflict.
Before the conflict began, investors had expected the ECB to hold interest rates steady through 2026.
This view has shifted dramatically, with markets now pricing in at least two 25-basis-point rate hikes by the end of this year, according to LSEG data. Meanwhile, the Bank of England also chose to keep borrowing costs unchanged, saying it was “ready to act” to contain risks from the war. The US Federal Reserve, too, had left rates unchanged on Wednesday, projecting higher inflation amid elevated uncertainty.
Bourses in Frankfurt, Madrid, London, Paris and Milan all fell more than 2 percent on Thursday.
Norway, however, climbed 1.6 percent to a fresh record high, extending its winning streak to a seventh straight session helped by a rise in energy stocks, which account for a major chunk of the index.
Most major sectoral sub-indexes in the STOXX 600 traded in negative territory, barring energy stocks. Miners shed 4.2 percent as gold prices retreated, while weakness among several heavyweight financial stocks added to market woes.
Europe’s fear gauge index firmed for the second straight session.
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